The Australian Bureau of Statistics released the latest December-quarter 2017 National Accounts data today (December 6, 2017). It showed several things that defy the hype in the media. First, overall real GDP growth was just 0.4 per cent for the quarter – 1.6 percent annualised – miserable. Even the actual annual rate of 2.4 per cent is well below past trends. Private capital formation was negative. Net exports were negative. Growth is being sustained by household consumption on the back of record levels of household debt and government spending (mostly local and state level investment). Without the contribution of government spending, overall growth would have been negative in the December-quarter. And this is a government that is trying to cut its deficit. This ‘rear vision’ account of where the economy was in the last three months of 2017 is thus not very good reading. Real GDP growth has fallen from 0.8 per cent in the June-quarter, to 0.6 per cent in the September-quarter to 0.4 per cent in the December-quarter. That is a trend I suspected would emerge. What is obvious to me is that private investment is flagging after showing some signs of recovery and a stronger fiscal contribution is necessary to ensure that household consumption scales more proportionately with growth in incomes rather than debt. than is evident in the current data. The external sector continues to make a negative contribution to growth with exports falling. There is no big Post Mining Boom-Export Boom happening folks. The one positive was that growth in compensation of employees was above 1 per cent for the quarter and 4.8 per cent for the year. We will see whether that materialises into a trend. As I concluded last quarter, the overall assessment is that growth is positive but slowing. And, it remains unbalanced and uncertain.
The main features of the National Accounts release for the December-quarter 2017 were (seasonally adjusted):
- Real GDP increased by 0.4 per cent. The annual growth rate was 2.4 per cent and remains below the rate that is required to keep unemployment from rising given usual trends in productivity and labour force growth.
- The main positive contributors to real GDP growth was household consumption (0.6 percentage points) and General government (0.3 points).
- The main negative contributing factors were Private Capital formation investment (-0.5 percentage points) and Net exports (-0.4 percentage points). Exports alone subtracted 0.4 points of growth.
- The public sector overall (consumption and investment) added 0.3 points to growth – with public consumption spending (0.1 points) and capital formation (0.2 points).
- Australia’s Terms of Trade (seasonally adjusted) rose by 0.1 per cent in the quarter but fell by 1 per cent over the 12 month period.
- Real net national disposable income, which is a broader measure of change in national economic well-being was static for the quarter and rose by just 1.5 per cent for the 12 months to the December-quarter 2017, which means that Australians are slightly better off (on average) than they were at that point 12 months ago but unchanged in the last three months of 2017.
- The Household saving ratio (from disposable income) rose from 2.5 to 2.7 per cent but remains well below the levels we saw just after the GFC.
Overall growth picture – slowing underway
The ABS told us yesterday (March 6, 2018) in the data release – Balance of Payments and International Investment Position, Australia, Dec 2017 – that:
Increased goods imports, flat goods exports and a widening net primary income deficit were the main contributors to the current account deficit increase in the December quarter 2017 …
In volume terms, exports fell and imports rose this quarter, and as a result international trade is expected to detract 0.5 percentage points from growth in the December quarter 2017 Gross Domestic Product.
So after all the hype about the once-in-a-hundred years mining boom, the external sector is still draining growth and exports
Rural goods fell by a staggering 9.7 per cent in real terms and capital goods imports felll by 5.8 per cent in real terms. Non-rural goods (mining ores, coal etc) fell in real terms by 0.3 per cent.
So no boom is going to come from the export sector any time soon.
Australia continues to experience an unstable growth outlook.
According to the ABS, the contribution of household consumption expenditure was mainly “driven by rises in health (3.4%), hotels, cafes and restaurants (2.9%) and recreation and culture (2.0%)”.
So we are paying more to be sick and partying a bit more!
The other growth contributor was public spending and “Government final consumption expenditure increased 1.7%” (“State and local government consumption grew 0.7%, while national government consumption increased by 3.1%.”).
The ABS note that “Public investment increased 2.9% during the quarter driven by state and local general government (1.9%). This increase was due to an asset transfer from the private sector.” At this stage, we don’t know what that transfer involved.
On the other hand, “Private investment decreased 2.2% and was driven by non-dwelling construction (-8.0%) and to a lesser extent dwellings, which fell 1.3%.”
The graph the quarterly growth over the last five years (with the red line being the ABS moving average trend). The trend growth is now flat and quarterly growth is slowing.
Analysis of Expenditure Components
The following graph shows the quarterly percentage growth for the major expenditure components in real terms for the December-quarter 2017 (gray bars) and the December-quarter 2017 (blue bars).
The large swing in public sector capital investment expenditure is clear and significant for the overall growth result. Public investment tends to be lumpy – something big gets purchased which lasts for a long time.
The growth in public investment reflects the scaling up of large State government projects in Melbourne and Sydney and an “asset transfers from the private sector” – we will wait to see what that was.
Domestic demand growth declined slightly to 0.56 per cent in the December-quarter 2017, reflecting the 2.2 per cent drop in Private investment expenditure.
Household consumption growth reversed the slowdown in the September-quarter and rose sharply to 0.96 per cent (up from 0.53 per cent in the September-quarter). The saving ratio rose slightly, which may signify that the credit-binge that has been driving consumption growth in recent quarters is coming to an end as employee compensation has finally started to rise.
Private investment growth was negative (2.23 per cent).
Exports volumes fell by 1.75 per cent (despite rising prices) and import growth was weaker (0.55 per cent).
The following graph shows the profile of public consumption and investment expenditure at the different levels of government.
It is clear that public sector investment expenditure has been very strong over the last year, particularly at the state and local government level (large projects such as the Metro expansion in Melbourne, Westconnex in Sydney).
The Federal government investment was negative for the quarter and the year.
Contributions to growth
What components of expenditure added to and subtracted from real GDP growth in the December-quarter 2017?
The following bar graph shows the contributions to real GDP growth (in percentage points) for the main expenditure categories. It compares the December-quarter 2017 contributions (grey bars) with the June-quarter 2017 (blue bars).
Net exports continued to subtract from growth in the December-quarter 2017, as export volumes fell.
Private household consumption contributed 0.6 percentage points to growth (up from a revised 0.3 points) and the saving ratio rose slightly.
The public consumption contribution rose to 0.3 points while public investment (capital formation) added 0.2 percentage points to growth.
The overall contribution of the government sector to growth was thus 0.5 percentage points. Without that contribution overall growth would have been negative.
Material well-being static in December quarter
The ABS tell us that:
A broader measure of change in national economic well-being is Real net national disposable income. This measure adjusts the volume measure of GDP for the Terms of trade effect, Real net incomes from overseas and Consumption of fixed capital.
While real GDP growth (that is, total output produced in volume terms) grew by 0.4 per cent in the December-quarter 2017, real net national disposable income growth was zero.
Over the 12 months to December 2017, Real net national disposable income grew by just 1.5 per cent, which means that Australians were better off in the December-quarter 2017 in income terms than they were twelve months prior.
The following graph shows the evolution of the quarterly growth rates for the two series since the December-quarter 2006.
Household saving ratio rose modestly to 2.7 per cent
The squeeze on wages in Australia is manifesting in two ways. Rising indebtedness and a falling saving out of disposable income. Household consumption has been driven in recent quarters by credit and saving withdrawals although the growth in employee compensation in the December-quarter may alter that.
The following graph shows the household saving ratio (% of disposable income) from 2000 to the current period.
Over the last 12 months the household saving ratio has fallen from 4.0 per cent (December-quarter 2016) to 2.7 per cent (December-quarter 2018).
The decline in the Household saving ratio from its 2011 levels has been associated with a renewed rise in household indebtedness – back to record levels. It was also the period when the federal government started to turn on the austerity wheel.
After the GFC hit, the household sector sought to reduce the precariousness in its balance sheet exposed by the GFC.
Prior to the crisis, households maintained very robust spending (including housing) by accumulating record levels of debt. As the crisis hit, it was only because the central bank reduced interest rates quickly, that there were not mass bankruptcies.
In June 2012, the ratio was 11.6 per cent. Since the December-quarter 2013, it has been steadily falling as the squeze on wages has intensified.
While the recent trend has been downwards, it is unlikely that households will return to the very low and negative saving ratios at the height of the credit binge given that the household sector is now carrying record levels of debt.
Perhaps the recovery in employee compensation signalled in this data release will allow the saving ratio to stabilise at a higher level and allow some reduction in household indebtedness to slowly occur. I am not be confident of that yet though.
Real GDP growth and hours worked
The following graph presents quarterly growth rates in real GDP and hours worked using the National Accounts data for the last five years to the December-quarter 2017.
You can see the major dislocation between the two measures that appeared in the middle of 2011 persisted throughout 2013 and reasserted itself in early 2016.
In the December-quarter 2017, real GDP growth and hours worked moved in opposite directions – hours up sharply and growth down.
Today’s data shows that GDP per hour worked (productivity of labour) fell by 0.8 per cent in the December-quarter 2017, which is no surprise given that total hours worked rose by 1.0 per cent while real GDP rose by 0.4 per cent.
To see the above graph from a different perspective, the next graph shows the annual growth in GDP per hour worked (labour productivity) from the June-quarter 2008 quarter to the December-quarter 2017. The horizontal blue line is the average annual growth since December-quarter 2007.
The relatively strong growth in labour productivity in 2012 and the mostly above average growth in 2013 and 2014 helps explain why employment growth had been lagging given the real GDP growth. Growth in labour productivity means that for each output level less labour is required.
In the December-quarter 2017, annual labour productivity growth was minus 1.0 per cent and marked four consecutive quarters of negative growth. This will mean the relatively slower annual real GDP growth rate will probably not push unemployment up as much as it would had productivity growth been close to that average.
Remember that the National Accounts data is three months old – a rear-vision view of what has passed and to use it to predict trends is difficult.
Coming up with assessments of where the economy is heading requires analysis of the more recent data – such as labour force surveys and the like.
But today’s National Accounts data indicates that slowdown in the Australian economy that started in the June-quarter 2017 continued up until the end of the year.
The fact that growth would have been negative but for the contribution of the public spending tells us two things.
1. Government spending is good for the economy (if growth is desirable).
2. This is no time for austerity given the weak private investment and the on-going negative trade contribution.
Overall, this is not a balanced growth outcome. The outlook is very uncertain given the lumpiness of the public spending.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.